Can a business that is a MSB but doesn't issue money orders or is a money transmitter be granted exemption status. We have a grocery store account in a small town that cashes checks but doesn't issue money orders or is a money transmitter.

Sure. MSB's can be exempt; however, there is a higher level of due diligence. I believe FinCEN issued a guidance memo about this topic.

Many here at BOL would suggest that you never grant ANY Phase II exemptions - let alone to a MSB. I simply saying it is technically legal - not necessarily prudent.